The Forgotten Man: A New History of the Great Depression . By AmityShlaes HarperCollins, 2007, 464 pp. $26.95

Summary: Amity Shlaes' The Forgotten Man is a useful antidote forthose whose knowledge of the Great Depression comes from textbooksthat lionize Franklin Roosevelt's New Deal and paper over his seriouspolicy errors.

Charles W. Calomiris is Henry Kaufman Professor of FinancialInstitutions at Columbia University's Graduate School of Business.

Of Related Interest

Topics:Economics, trade and finanaceU.S. policy and politics

William Graham Sumner, who at the turn of the twentieth centurypractically invented the field of political economy in the UnitedStates, was the first to coin the phrase "the forgotten man." It washis term to describe the citizen who loses out as a result ofgovernment interventions that favor special interests. The forgottenman, according to Sumner's definition, is someone looking for a chanceto make it on his own -- and who the government can help most byprotecting economic freedom, providing a stable currency, and limitingthe burden of taxation.

Franklin Roosevelt's -- and, to a lesser extent, Herbert Hoover's --forgotten man was based on a new idea, one largely antithetical toSumner's. By 1933, the forgotten man had become someone who wasunemployed and increasingly desperate, who was forgotten by the marketand could be lifted up only by a beneficent government that tookcontrol of the economy, through such measures as the economic planninginitiatives of the New Deal era: the National Industrial Recovery Act,the Tennessee Valley Authority, the Agricultural Adjustment Act, theWorks Progress Administration, and model agricultural communities.

After 1935, in the wake of continuing policy failures and SupremeCourt rulings against his initiatives, Roosevelt used the phrase inhis appeals to particular classes of people whose political support hesought, people who felt disenfranchised within larger society: theunemployed, the underprivileged, and the generally disaffected. Butthere were others who sought to reclaim the original meaning of "theforgotten man" as Sumner had formulated it, not least Wendell Willkie,who made the concept part of his platform when he ran againstRoosevelt as the Republican candidate for president in 1940.

The title of Amity Shlaes' new history of the Great Depression refersto a concept whose changing meaning mirrored the shift in ideologyabout the role of government during the 1930s. "To justify giving toone forgotten man," writes Shlaes, "the administration found, it hadto make a scapegoat of another. Businessmen and businesses were thetargets. Roosevelt's old mentor, the Democrat Al Smith, was furious.Even [John Maynard] Keynes was concerned. In 1938 he wrote toRoosevelt advising him to nationalize utilities or leave them alone --but in any case cease his periodic and politicized attacks on them.Keynes saw no point 'in chasing utilities around the lot every otherweek.' Roosevelt and his staff were becoming habitual bullies, pittingAmericans against one another. The polarization made the Depressionfeel worse. Franklin Roosevelt's forgotten man ... perpetually tangledwith Sumner's original forgotten man." On the most basic level, TheForgotten Man is a comprehensive history of economic policymaking inthe United States during the Great Depression. Shlaes seeks to explainwhy the Depression lasted as long as it did (over a decade) despite apanoply of aggressive policy experiments, especially by Roosevelt'sadministration. Each chapter of the book begins with bleak andsobering figures that highlight the Depression's persistence.Unemployment, which stood at roughly 5 percent in the fall of 1929,skyrocketed to 23 percent four years later and was still above 17percent as late as January 1938. Industrial production peaked inSeptember 1929 and, with the exception of a few months in 1937, didnot reach the same level again until 1939. The Dow Jones industrialaverage, which had reached 343 on October 1, 1929, was still worthless than half that amount in January 1940. The main theme in Shlaes'account of the policy experiments that are collectively known as theNew Deal (along with other measures related to monetary- andexchange-rate policy and banking system interventions) is theirfailure to restore economic activity to the levels of the 1920s.

But there is much more to the book than that narrative. It is also ahistory of the development of U.S. culture, politics, and economicpolicy, which were uniquely and inextricably intertwined during theDepression. Shlaes explores the changing popular conceptions duringthis period of what the roles and powers of government and businessought to be. As such, it is a work of great skill, even brilliance.

The Forgotten Man will also be a popular book, because it does allthat while still managing to be a fun read. Alongside the highbrowideological, economic, and political history are entertainingvignettes of individuals great and small. These insightful portraits,with their revealing facts and anecdotes, bring the policy history tolife. At the same time, the portraits are absent of heavy doses ofopinionated interpretation, leaving room for the reader to judge thecharacters based on their own words and actions instead of theauthor's pronouncements.

By the end of the book, the reader will be familiar with the author'sadmiration for Willkie's common sense and good manners (he is the heroof the book), the financier Andrew Mellon's forbearance andselflessness, and the courage of the Schechter brothers, kosherbutchers from Brooklyn who stood up to dictatorial National IndustrialRecovery Act policies prescribing how chickens should be sold andtriumphed in a landmark 1935 Supreme Court case. Not all theportrayals are loving, of course, but even the negative ones arebalanced; none of the characters is made of cardboard. Roosevelt iscorrectly portrayed as a pragmatist who began as an economicexperimenter (1933-35) but then became a class warrior (1935-38) ashis economic policies failed and he focused on the narrower goal ofseeking to assemble a winning coalition for the 1936 presidentialelection.

A DEPRESSING RECOVERY

Some readers -- those whose prior knowledge of the economic history ofthe Depression comes from high school or college textbooks -- may findthe basic facts about the economy and economic policy reviewed byShlaes a bit surprising. Most basic treatments of the Depression andthe New Deal are written by social and political historians withlimited knowledge of economics. They tend to view the Depression as aninevitable consequence of alleged market excesses of the 1920s and seethe New Deal as having substantially aided economic recovery. (Anotable exception to this rule is the recent best-selling textbook APatriot's History of the United States, by Larry Schweikart andMichael Allen, which offers a detailed review of the deficiencies ofother textbook treatments of the Depression and the New Deal.)However, the research of economists and economic historians tells avery different story, one consistent with Shlaes' account. TheDepression resulted primarily from poor monetary policy by centralbanks, including the Federal Reserve, and was perpetuated by acombination of disastrous fixed-exchange-rate policies (whichtransmitted deflation around the world), protectionism, and the severeproblems with the balance sheets of banks and firms. In the UnitedStates, added damage was done by the wrong-headed policy responses ofthe Hoover and Roosevelt administrations, including New Deal policiesthat raised prices and wages (phase 1 of the New Deal, before 1936)and those that raised taxes and increased the costs of hiring laborers(phase 2, after 1936). Whatever the desirability of the New Dealpolicies from other perspectives, they did not provide an effectiveboost to the economy.

Shlaes' criticisms of these policies will be familiar to economistsand economic historians who have studied the Depression. (For a recentoverview of the academic literature, see Randall Parker's TheEconomics of the Great Depression and Michael Bordo, Claudia Goldin,and Eugene White's The Defining Moment.) It is well known amongscholars of the Depression that there was no consistent theme orphilosophy underlying New Deal policies but rather that Roosevelt andhis changing team of experts innovated in ways that were hard topredict and impossible to explain from the perspective of any coherentmacroeconomic theory. Even economists at the time, including IrvingFisher and Keynes, recognized this.

Economists and economic historians today, echoing Fisher and Keynes inthe 1930s, generally see the abandonment of the gold standard in 1933,which allowed the money supply and the economy to begin to grow, asRoosevelt's major contribution to economic recovery. Other New Dealpolicies are generally understood to have set back the recovery ofproduction, employment, and asset prices, as Shlaes argues. TheNational Recovery Administration's price and wage hikes have long beenseen as mistakes (and a continuation of Hoover's bad policies) thatcontributed to unemployment and the slow recovery of production from1933 to 1935. The tax hikes and labor legislation of 1935-37 have beenwidely considered by scholars as having prolonged the economy's slowrecovery and meager job growth during those years and as having helpedcaused the relapse into recession in 1937. Shlaes' contention thatpolicy errors -- and, more important, the unpredictability of policy-- fed economic uncertainty and discouraged businesses and consumersfrom investing and consuming is not a new view of the New Deal.

A few scholars may quibble with some of Shlaes' claims. She arguesthat Roosevelt's ad hoc management of the dollar's value after March1933 and his decision to abandon multilateral efforts to reestablishthe international gold standard created unnecessary price-leveluncertainty. This may be true, but the point seems a bitoveremphasized in light of the positive effects of abandoning goldparity -- namely, the growth that came from decoupling monetary policyfrom worldwide deflation. Similarly, Shlaes' mainly tangentialdiscussion of banking crises in the early 1930s exaggerates the impactof depositor panic, underestimates the difficulty of solving theproblems that were then gripping banks, and overstates the ability theFederal Reserve had to prevent financial distress by pumping moreliquidity into the system. The abolition of gold clauses in bonds in1933 (which allowed creditors to repay their debts in depreciatedpaper dollars rather than in a fixed quantity of gold) was not, asShlaes argues, merely a redistribution of wealth from creditors todebtors; as the economist and current Federal Reserve governor,Randall Kroszner, has shown, the measure benefited creditors -- andthe whole economy -- by increasing the likelihood that depreciateddebt would be repaid.

In spite of these few shortcomings, however, Shlaes' overall analysisof the economic history of the Depression is remarkably well informedand balanced. Her emphasis on the disastrous effects of highertaxation of corporate profits and retained earnings in the mid-1930sis especially incisive. In the areas where the analysis is a bit weak(especially pertaining to financial-sector issues), the controversiessurrounding those matters are largely beside the point of the book.

Shlaes' main contribution is not the novelty of any one of her viewsabout economic policy but rather her ability to synthesize the storyof policy failure with a cultural and ideological history. In doingso, she tells the tale of the Depression in a way that allows readersto understand how leaders as intelligent as Hoover and Roosevelt couldhave failed to get the economy back on track for so long.Inconsistencies in economic policy over time reflected politicalleaders' basic lack of understanding of economics, upheaval in thecomposition of President Roosevelt's pool of most influentialadvisers, and the schizophrenic nature of those advisers' politicaland economic ideologies (alternating as they did between budgetbalancing and aggressive spending, between attacking big business andsupporting corporate consolidation). Moreover, Supreme Court rulingsthat rejected the constitutionality of many actions from the firstwave of the New Deal and, later, partisan strategies designed to favorparticular groups that Roosevelt believed would deliver his reelectionfurther hampered meaningful reform and economic recovery.

Shlaes properly attributes the persistence of the Depression in partto a new ideological orientation toward government intervention thatgained credence in the 1930s: the idea that there is great potentialgain and little harm in ad hoc policy experiments designed to plan andshape the economy. Shlaes believes that this ideology reflected a lackof understanding of the damage that state intervention can wreak onthe economy -- especially when applied in an incoherent andunpredictable way -- and a failure to appreciate the ability of themarket to successfully respond to economic challenges on its own whenit is permitted to do so. Ill-advised government plans during theDepression were often destructive to recovery and damagedprivate-sector initiative either willfully or unwittingly by imposinghigh taxes and creating an environment of high political andregulatory risk.

GONE BUT NOT FORGOTTEN

As the 2008 presidential election nears, Shlaes' book will make goodbedtime reading. During the campaign, the candidates will offerhundreds of new policy ideas for ways to make the economy performbetter and to help the new generation of "forgotten" men and women.The Forgotten Man offers the useful reminder that seemingly bright newgovernment initiatives can cause harm as well as good. It especiallyhighlights the unintended risks of class warfare in the formulation ofpublic policy. Policies that cater to disadvantaged constituencies,perhaps, as in 1936, as part of a political strategy for electoralvictory, can sour the economy and end up harming those whom they wereintended to help. A protectionist backlash against China, for example,could result in a major global growth slowdown and the destruction ofmillions of U.S. jobs.

The Forgotten Man is history with a point of view -- a moral historyin the best sense of the term. For economists and economic historians,the book offers a synthetic view that places the myriad policy errorsof the 1930s within a coherent narrative about the evolution of U.S.culture and ideology and that is full of insightful commentary aboutthe main players in this drama. For nonspecialists, many of whom maybe suffering from fundamental misconceptions about the New Deal, thebook will be an eye opener.